Assume that the average firm in your company Assume that the average firm in you
ID: 2707352 • Letter: A
Question
Assume that the average firm in your company
Assume that the average firm in your company's industry is expected to grow at a constant rate of 6% and than its divided yield is 7%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D; work that lead you to expect that its earnings and dividends will grow at a rate of 50% [D1=D0 (1+g) = D0(1.50)] this year and 25% the following year, after which growth should return to the 6% industry average. If the last dividend paid (D0) was $1, what is the estimated value per share of your firm's stock?Explanation / Answer
Expected return = Dividend yield + constant growth yield = 7+6 = 13%
D1 = 1*1.50 = 1.50
D2 = 1.50*1.25 = 1.875
D3 = 1.875*1.06 = 1.9875
Estimated value per share of your firm